Fade Sterling Optimism
|In our view GBPUSD rally to 1.4280 is more a function of USD weakness them purely confidence in the UK. We remain slightly bearish on the outlook for the sterling. Despite general optimism driven by the positive progress in Brexit talks, driven by failure of economic recession post-brexit predictions to materialize and strength of trading partners, the UK is in a fragile place. There is increasing evidence of a global slowdown which will manifest itself in weaker UK growth and inflation. This will also decelerate BoE interest rate expectations providing USD will sustained yield differential and rotating investors back into USD from GBP.
Finally, increased focus on complex trade talks, led by US / China, will likely push Brussels into a tougher stance on UK relations. “Break throughs” will become hard and harder to achieve. We think the market was muted in pricing in proposals for a border between the Republic and Northern Ireland. Given the complexity of the issue both from a Brexit economic standpoint and social/political we should have seen higher GBP volatility. In regards to Brexit, investors have clearly been conditioned to ignore short term hype. Hences the lack of movement. UK-EU must avoid a hard border of extensive custom checks. Republic and Northern Ireland will plague negotiations moving forward. This is one of those convergence issues that make the UK-EU relationship so difficult to unwind.
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